Eurodad advocates for more
effective flows of development finance to developing countries. In recent
years, development institutions have dramatically increased their lending and
investments to the private sector. As a result, Eurodad’s work is increasingly
focusing on these flows.

The increasing shift
towards the private sector in development finance is based on the uncontested
assumption that greater private financial flows to developing countries are an
effective way to support development, regardless of the terms and conditions
under which they take place. Indeed, a vibrant
private sector is crucial for development, as it creates jobs, provides
essential goods and services, and is a source of tax revenue. However, not all
private sector activities have a positive impact in development terms.

Eurodad research shows that public flows supporting private
sector investments have failed to deliver positive development outcomes in the
past. All too often development finance institutions support investments by
large transnational companies from rich countries as opposed to smaller
companies in poor countries. These institutions also fail to ensure that the
companies they invest in comply with a minimum set of responsible finance
standards, which would ensure they pay their fair share of taxes in the
developing countries where they operate.

Eurodad believes that
certain conditions need to be put in place to make sure that private
investments have a positive impact on the poor. It works to put forward
proposals to increase the development effectiveness of increasingly diversified
North-South financial flows, and to ensure that all these flows comply with responsible financing standards.

For decades, donor
governments and multilateral institutions have provided grants and loans to
private sector companies operating in developing countries. However, the scale
of this support has increased dramatically since the 1990s. In 2010, external
investments to the private sector by international financial institutions (IFIs)
exceeded US$40 billion. By 2015, the amount flowing to the private sector is
expected to exceed US$100 billion.

Bilateral development finance
institutions (DFIs) from industrialised countries and private sector arms of multilateral
development banks (MDBs) have channelled most of these flows. In the past, this
support has been in the form of loans, equity investments and guarantees.
However, recently these institutions have begun to provide an increasingly
larger share of overseas development assistance (ODA) to the private sector.

The increasing role of
these institutions as key players in the development finance agenda has taken
place despite the lending institutions’ unclear development mandates and poor
track records for delivering pro-poor development results.

Eurodad is committed
to deepening the knowledge among non-governmental organisations (NGOs) of the
quantity and quality of these flows, their impacts on development and the role
and policies of DFIs.

DFIs and IFIs have historically focused on infrastructure and energy.
However, since the global economic and financial crisis, most institutions have
massively increased investments in developing countries’ financial sectors. The
World Bank’s International Finance Corporation (IFC) is the leader in this
field with more than 40% of financial sector investments, a proportion
that is growing steadily and a pattern that other institutions have followed.

Commercial banks are by far the largest recipients of funds among
financial intermediaries (FIs), although private equity funds and other opaque
investment mechanisms are quickly becoming favoured vehicles. This has
increased the lack of transparency over the use and effectiveness of public
development finance.

One of the main arguments provided by IFIs and DFIs to justify this massive
shift to the finance sector is their willingness to scale up funding for micro,
small and medium- sized enterprises (MSMEs). However, besides general
statements of intent, it is almost impossible for external stakeholders to actually
track whether development money has reached the intended beneficiaries (MSMEs).
This is because the financial intermediaries do not provide disaggregated data in
their annual reports about which projects and companies they supported and what
development impacts were achieved.

Together with members and allies, Eurodad is committed to putting
forward proposals to ensure that the funds channelled through FIs are
accountable, transparent and development-oriented.

The notion that public
investments should be used to ‘leverage’ additional investments from private
actors is increasingly used in a variety of development finance forums. The
World Bank has become one of the leading proponents of this concept, in some
cases with aid and in others with guarantees. Several European governments and
institutions have followed this pattern.

In practice, different
DFIs are using a set of different financing instruments to channel their funds.
The most prevalent by far are direct loans to domestic and non-domestic private
sector enterprises in developing countries. However, the use of equity as a
financing instrument is rising rapidly.

In addition, many
donor agencies and international institutions are increasingly supporting
public-private partnerships, ‘blending’ facilities and other mechanisms
designed to leverage private investment. Blending facilities link ODA with
loans from public finance institutions or commercial loans to make them
concessional. The EU has been pushing strongly for an increased use of this
finance mechanism.

Eurodad is committed
to deepening NGOs’ understanding of the financing modalities used by DFIs and their
implications. Some of these mechanisms might pose financial and debt risks for
developing countries, which might in turn undermine their capacity to
contribute to positive development outcomes.